How can the same index constituents produce different concentration and returns?

Read construction rules as well as the constituent list

Identify the eligible universe, inclusion rules, weighting method, caps and rebalancing schedule. A list of company names is only part of the benchmark. Index-provider documentation distinguishes market-capitalization, float-adjusted and equal-weight approaches; these definitions affect what the published number measures.

This article’s original toy indexes use full stipulated market capitalizations, with no float adjustment, caps, corporate actions, cash flows or fees. They are examples of index construction, not recommended portfolio targets or representations of a named market index.

Weight the same three fictional companies twice

Suppose fictional Companies A, B and C have starting market capitalizations of $600 million, $300 million and $100 million. Total capitalization is $1,000 million. A full-capitalization-weighted toy index therefore starts at 60%, 30% and 10%. An equal-weight toy index starts at one-third in each company.

Both contain three companies, but the largest starting weight is 60% in the first and about 33.3333% in the second. The name count did not reveal that difference. Equal dollar weights also do not mean equal share quantities when prices differ, nor do they establish equal exposure to business risks.

Apply the same invented return period

Stipulate one period with A returning −10%, B returning +10% and C returning 0%, measured on the same basis. With no intervening rebalancing or external cash flows, the capitalization-weighted toy return is 0.60 × −10% + 0.30 × 10% + 0.10 × 0% = −3%.

The equal-weight toy return is one-third × −10% plus one-third × 10% plus one-third × 0% = 0%. The different result follows from starting weights, not different constituent forecasts. Reversing the two nonzero returns would reverse the sign of the capitalization-weighted result, so this worksheet supplies no ranking of methods.

Follow the rule through time

Weights can drift as constituent values change. An equal-weight method needs a stated process and date for restoring equal weights; it is not automatically equal at every instant between resets. A real capitalization-weighted index can also use float factors, caps and corporate-action adjustments absent from this toy model.

Inspect sector, geography, business exposure and constituent overlap when interpreting concentration. Giving each company the same starting weight does not make their risks independent. Likewise, a capitalization-weighted benchmark’s largest influence is not a recommendation to hold that weight. The benchmark description and an investor’s allocation decision are separate questions.

Method, sources, and limits

The companies, weights and returns are hypothetical and independently checked on 26 October 2026 against primary index education. No index fund, provider or allocation is recommended. The one-period calculation omits real index implementation, distributions, turnover, costs and tax; it cannot establish which weighting method will outperform.